Are India’s tech startup serious businesses? Or will they just fade away when the funding stops?

The other day, I came across a TV interview of Rahul Yadav, who was CEO of a startup named Housing. com till he was sacked by the board. The interview is old, having being conducted in September 2015. However, there is one part of it which offers an interesting insight into what is wrong with Indian startups. At one point in the conversation, Yadav confesses that he doesn’t like ‘Excel sheets’. He says that when they (he and his cofounders, presumably) were meeting potential investors, if the investor asked for Excel sheets, they would just drop that investor.

It’s clear from the conversation that the loathing is not for any particular software sold by Microsoft. Instead, ‘Excel sheets’ are a synonym for calculations and projections about the business. These spreadsheets would have calculations about how much the business would spend, how fast it would expand, how much could it earn and from what kind of activities it may make money. However, if any investor turned out to be the sort who was interested in discussing such things, these entrepreneurs just stopped talking to him and moved on to someone else. As Yadav says, with a sly smile at one point in the interview, that when an investor wanted too much detail, he knew it wouldn’t work out.

Now there’s nothing unusual about this attitude. This has been a time-honoured tradition of Indian promoters since long before these digital days avoid investors who are interested in too much detail, just look for a greater fool instead. However, I do feel that in the domain of technology startups, this attitude arises from a fundamentally different premise. Earlier, promoters had complete self-awareness that they were doing something shady by fooling the investors about the true nature of the business. Nowadays, the entrepreneurs seem to be fooling themselves, too.

They seem to firmly believe that as long as they have enough scale, that’s great, even if they are losing money on each transaction. There’s a joke about this: “We know we are losing money on each customer, but we’ll make it up on volumes.” It’s not a great joke, till you Google it and find that a lot of people don’t know it’s a joke. There’s a widespread belief among startups that this really is true. The opposite view, that a business is a business and cannot defy the basic logic of sales, expenses, profit and loss for too long, is seen as something that doesn’t apply to new, technologybased businesses. The fundamentals of business cannot be ignored for too long.

One of the problems in India is that there seems to be a widespread belief that the marquee startups are justified in going through a long period of heavy losses because Google, Facebook and Amazon went through this. The problem with this idea is our skewed idea of what ‘tech’ is. During the time that they were making massive losses, the big American Internet giants were building their infrastructure and developing genuinely groundbreaking technology.

Even Amazon, which was supposed to be just a retailer, invented the infrastructure-as-a-service concept and is now ahead of Google, Microsoft, IBM et al in cloud computing with its fabulously profitable AWS (Amazon Web Services) business unit.

Nothing remotely resembling this is going on with Indian tech businesses, which seem wedded to the idea of almost literally giving away money to customers in every transaction.

In a way, it shouldn’t really matter to anyone if a lot of businesses lose money belonging to greater fool investors and eventually shut down. However, the negative impact on employees, suppliers, the brick-and-mortar competitors put out of business and on the business environment generally will be huge. It would actually be good for everyone concerned if India’s zombie startups reach their logical end sooner rather than later.

The government will organise a ‘Startup Fest’ in Hyderabad this September, with a view to showcase innovation and provide a collaboration platform.

The startup ecosystem has truly taken off, and India is one of the fastest growing startup countries now. Since the launch of ‘Startup India’initiative last year, many startups have come up with inventions, making our life easier and indeed becoming our intelligent personal assistants.

Therefore, the main objective of the fest is to stimulate the startup ecosystem and bring about a 360 degree visibility to the burgeoning entrepreneurs in India.

The Department of Industrial Policy and Promotion (DIPP) has requested Prime Minister Narendra Modi to inaugurate the event, officials said.

As many as 571 budding entrepreneurs have filed applications as on June 24, with the DIPP for recognition as innovative startups to avail tax breaks and other benefits.

Realising the potential of startups in India, Prime Minister came out with a slew of incentives in January to boost the Indian startup ecosystem by offering a tax holiday and inspector raj-free regime for a period of three years, capital gains tax exemption and INR 10,000 Cr corpus to fund them.

India has the third largest number of startups globally. To boost financing, a 20 per cent tax on capital gains made on investments by entrepreneurs after selling own assets as well as government-recognised venture capitalists is also exempted.

Commerce and Industry Minister Nirmala Sitharaman has asked the Finance Ministry to consider raising tax holiday for startups to seven years to encourage budding entrepreneurs.

A recent notification issued by the ministry of corporate affairs (MCA) makes it easier for startups to access funds via the convertible note route.

This notification is part of the all-round initiatives planned by the government to strengthen the startup ecosystem in India.

Funds received by a startup amounting to Rs 25 lakh or more by way of a convertible note, in a single tranche from a person, will not be treated as a `deposit’. The convertible note is to be either converted into equity or repaid within a period of five years.The Companies (Acceptance of Deposits) Rules have been accordingly amended via a notification dated June 29.

Owing to this relaxation, the stringent rules relating to informing the registrar of companies (RoC) or creating a deposit repayment reserve in the books of accounts will not apply to the startup receiving funding via convertible notes. However, it should be noted that the relaxation is available only to startups that meet the governmentprescribed norms (as defined by the department of industrial policy and promotion, or DIPP).

This notification is the second such initiative to ease funding challenges for startups. TOIhad in its edition da ted June 20 reported that eligible startups will be exempt from angel tax. They will not have to pay any tax on the differential between funding received from non-registered funds or high net worth individuals and the fair market value of their entity.

Startups are defined by a DIPP notification dated February 17, 2016, to mean “an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial ye ar”. Second, such an entity is required to be engaged in “development, deployment or commercialization of new products, processes or services driven by technology or intellectual property”.

If a tax holiday is to be availed, the entity is required to be set up between April 1, 2016 and March 31, 2019 and an approval of an inter-ministerial board set up by DIPP is required. The tax holiday is available for a period of three years in a block of initial five years.

571 apply for Startup India initiative

A status report issued by `Startup India’, the government initiative under the auspices of the DIPP, provides an indication of the interest in the programme. Till June end, 571 applications had been received from entrepreneurs. While 106 of these applications were complete, all of them will not get a tax holiday (even as other incentives could be available) as a majority of these companies were incorporated prior to April 1. Only 12 entities qualify for the tax holiday, subject to clearance by the inter-ministerial board. Five of these entities have yet to provide the required documents. DIPP is reaching out to top companies requesting them to set up new incubators or scale up existing incubators in collaboration with educational institutions. An online learning module will soon be available for entrepreneurs.

Starting a business overseas can be an exciting time for an entrepreneur. There are many people who dream of starting a company in another country, but very few of them actually go through with it. They are missing out on a huge amount of potential because opening a business abroad comes with a lot of key benefits.

These are the main reasons why now is the time to start considering a business move abroad.

Open Up Untapped Markets
The biggest problem entrepreneurs have today is that they are constantly competing with others in their home country. Getting a unique idea is nearly impossible, and the chances are that there are at least a hundred other companies with similar concepts. Standing out from the crowd can be hard, but it’s not the same all over the world.

Something found in India could be non-existent in a country like Canada. Establishing a base of operations in another country could open up a completely new base of customers.

Government Incentives
A lot of countries have problems attracting foreign investors and businesses. To encourage people to come, they put the potential for tax cuts and grants on the table. Come up with a great business idea, agree to move to that country, and you can get a boost right from the beginning.

Just make sure that you’re weighing the pros and cons before you bother to chase these incentives.

Better Business Environment
Some countries are notoriously anti-business. That’s why more and more companies are deciding to move to other parts of the world where they don’t have to deal with the same bureaucracy.

More favorable rules can allow you to run your company without worrying about the paperwork that comes with running a company at home. Once you have your second citizenship you can get right to work with running your company.

More Business Recognition
Brand visibility is a major concern for newer companies. One of the first things to do when doing business in another country is to establish your brand. Many companies’ set up operations in their home country and then open a branch in another part of the world. This extra brand recognition makes it much easier to gain customers, and it gives your brand a sense of credibility.

Bring Your Business Back to Life
Not all entrepreneurs decide to start overseas. A lot of entrepreneurs decide to move overseas. Entering an overseas market can do a lot to bring an ailing business back to life. Companies that find themselves operating in saturated markets can acquire some breathing space by moving overseas.

Finding new customers and new outlets can completely turn your fortunes around.

How Can You Start a Company Overseas?
This is not a decision to take lightly. It’s something that you have to give a lot of consideration to because it can easily go wrong. If you don’t conduct research into your target market and execute your launch strategy properly, you could easily lose a lot of money.

So other than your target market what do you have to take into account?

You need to think about the rules and regulations of that country. The way things are done in other countries may be entirely contradictory to what you’re used to. Be prepared to adapt to a new culture and new business ideas that are completely foreign to you.

Consult a legal representative with experience in working with new companies in the country of your choice. They will be able to update you on what you need to know and what you have to be prepared to do in order to conform to the various rules.

Earlier this month, the Central Board of Direct Taxes (CBDT) issued a notification, repealing the much talked about angel tax in a bid to boost entrepreneurship in the country. However according to investors, the move has serious limitations and will only help a few start-ups owing to multiple riders associated with the definition of a start-up.

In a notification on June 14, the CBDT announced an amendment to Section 56(2) (viib) of the Income Tax Act. Under this, money raised by start-ups from domestic angel investors will not be taxed as income even if the investment exceeds the fair market value of the start-up’s shares. So far, the so-called extra inflow was taxable as income from other sources under Section 56(2) of the Income-Tax Act. It was charged the corporate tax rate which resulted in a tax of over 30%.

According to the government, an entity will be considered a start-up till five years from the date of its incorporation and if its turnover for any financial year has not exceeded Rs25 crore.

It is also supposed to be working towards “innovation”, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

In order to obtain the tax benefit, a start-up needs to get itself registered with the Department of Industrial Policy and Promotion (DIPP).

The catch is that out of multiple start-ups that will apply for this certification, not all will be eligible for that.

“The presumption is not everybody will get a certificate … The number of start-ups that have applied is far higher than what has been approved and that just tells you that there are many who will be just left out of the certification process for various reasons,” said Padmaja Ruparel, president at Indian Angel Network.

According to Dheeraj Jain, angel investor and partner at Redcliffe Capital, a UK-based hedge fund, while the government’s intentions were right, the on-ground reality post execution is different. “The Indian taxation system in itself is highly complicated, our government should endeavour to simplify it in order to give a much required impetus to entrepreneurs. Abolition of this tax after adding so many criteria does not help our situation, in fact it only adds another layer of documentation,” he said.

Ruparel also said that defining criteria such as “innovative” is subjective. “What is innovation? Those who are not “innovative” they will flip out of the certification process. There will be many who will not get covered. They will continue to be subject to section 56,” she said.

Sunil Goyal, founder and chief executive officer of YourNest Angel Fund termed the move as merely an incremental step. “The start-up needs to be registered and the process of that particular application, the criteria and the approval process is all very tedious,” he said.